Ask the Expert - Fundamentals of Contract Management

Contract management encompasses everything from establishing the business case and confirmation of need through to relationship management and reviewing performance.

You can find out more by watching the video above, and scrolling down to the bottom where you will find extra information you can download to further your learning experience. 

Ask the Expert - Fundamentals of Contract Management Q&A

Q 1 - There is currently some importance placed for sustainability. But as a distributor, there are not many suppliers that have sustainability CSR manufacturers that can supply. How do you mitigate this?

A - Sustainability has indeed become an important driver of how businesses and governments are conducting procurement. At the same time, it is known that the map is not the territory and that there are still some gaps in the market between buyers' requirements and suppliers' capabilities in that arena.

To mitigate this from a distributor's perspective, you could:

• Request meetings with the relevant buyers in your marketplace to discuss sustainability, specifically. Showing you care about solving sustainability issues should get you buyers' attention.
• Make sure you understand buying organisations' sustainability policies.
• Make a list of their sustainability and ESG requirements and criteria.
• Understand which requirements will be part of the evaluation criteria to rank your offer.
• Make sure you understand which sustainability and ESG criteria will be a pass or fail type of criteria e.g. does your company have an environmental policy? Or is your company required to have an ISO certificate 140001 - Environmental management? Is your company required to have a gender policy in place? etc.
• Understand which criteria may give extra points to your offer or differentiate you from competition e.g. will your offer get more points for reducing carbon emissions? Will it get more points for promoting underserved communities? Will it get points for creating jobs? etc.
• Comply with the minimum requirements from buying organisations, if not go back to the drawing board and comply, then communicate the improvements you have achieved.
• Establish a Supplier Development Plan with buyers that identify and address the sustainability gaps in your supply chain tiers i.e. suppliers and manufacturers.
• Work with your supplier community to deliver on the Supplier Development Plan.
• Once you have progressed, communicate/report back to buyers with achievements and possible challenges where they can help.
• Run some continuous improvements plans in your supply chain, both short and long term.
• Embed sustainability as part of your processes and supplier selection criteria.

To summarise, a distributor will add value to the buying organisations if it is actively developing its supply chain to deliver on the sustainability agenda. Investing in such supplier development plans is an investment that will differentiate your entity in the eyes of buyers, and deliver economic returns because you address sustainability and ESG criteria. Nowadays, sustainability means ROI and business.

Q 2 - Is it possible to make available, through CIPS, the typical KPIs for the health sector and some of matrix that Mathieu has used.

A - The typical KPIs that we see in the health sector are (non-exhaustive):

• Delivery on time: Monitoring whether the goods or services were delivered on-time.
• Lead Time: Monitoring the total time to fulfil an order.
• Delivery in full: Monitoring if any missing quantity in the delivery vs. purchase order.
• Quality: Monitoring the defect rate/whether there were any damaged goods, poor service delivery etc.
• Price: Did the supplier increase prices post-contract award or for the duration of a framework contract compared to its offer.
• Compliance Rate: Understand if suppliers fulfil your requirements.
• Critical issues: Were there any critical issues during the delivery, and how the supplier did solved the issues.
• Supplier Availability: Measure suppliers’ capacity to respond to demand e.g. How many days does it take to get an offer/responses, how many times did they solve critical issues.

For each KPI, you would need to define the level of service required in the contract (the Service Level Agreement) to establish what a satisfactory score is for KPIs. An example below for the KPI Delivery on time:

• Definition: Monitoring whether the goods or services were delivered on-time
• Measure: Number of days of delay vs the delivery date in the contract
• Measured continuously for each procurement case and total score reviewed every 12 months (36 months duration in total)
• Scoring:
  • On-time = 10 points
  • o 1 day of delay = 8 points
  • o 2 days o delay = 6 points
  • o 3 days of delay = 4 points
  • o 4 days of delay = 2 points
  • o >5 days of delay = 0
• Supplier rating:
  • o Exceeds requirement if 90% of all deliveries on-time and some early deliverieso Meets requirement if on-time in 90% of all deliveries and solved issues
  • o Non-satisfactory if on-time less than 90% of all deliveries and/or 90% but unresolved issues - > Liquidated damages
  • o Poor performance under 50% - termination of contract
  • o Qualitative feedback on the issues faced with supplier
  • o Performance management plan with areas to improve for the next period

The above are just examples and each organisation will have to develop its own KPIs and SLAs to suit its needs.

Q 3 - What are the differences between Sourcing and Procurement?

A - Please refer to the HPA and CIPS website and articles on sourcing and procurement for a more detailed answer.

In a nutshell, procurement in an organisation will usually include a sourcing strategy and activities.

Sourcing refers to the identification of sources of supply for buying goods or services e.g. finding suppliers. Activities will consist in building a database of potential suppliers, to then evaluate the financial, technical, and commercial capacity of the suppliers, and select the right supplier(s) to deliver the required products/services. Simply put Sourcing is the pre-contract award activities.

Procurement refers to the activity of getting the deliveries from the supplier identified and ensuring that the payments to the supplier are made. Simply put, procurement is the execution of the contract.

Q 4 - Appointment of service providers is it under procurement department?

A - The "appointment" itself or award of a contract to suppliers or service providers is usually the responsibility of a procurement department. However, the decision-making that leads to the award of the contract is a shared responsibility that follows the segregation of duties principles. In most organisations, the decisions about what to buy, which supplier we buy it from, and when to pay invoices, will be performed by at least three different persons to avoid that all the authority resides with only one person. This is to avoid error and fraud.

The roles and responsibilities are usually split as follows:

• Requisitioning unit (the department that needs the goods or services): defines the needs, requirements, and technical specifications, and holds the budget for the purchase.
• Procuring unit: The procurement manager will have the responsibility to advise the requisitioner on defining requirements to align them with suppliers' capabilities. He/she will issue the tenders to suppliers, recommend which suppliers to select following an independent evaluation, and get approval from the requisitioner to place a purchase order.
• Finance unit: The finance officer will be responsible for the payment of invoices and budget spends.

To sum it up, the Procurement department is facilitating the process of sourcing and selecting suppliers or service providers, but it plays the role of an expert advisor to the requisitioners.

Q 5 - What is the usual KPI that you measure against suppliers?

A - This depends on the following:

Your organization and sector and what you goals are. However, there are common indicators such as :

• Quality of supplies against pre-agreed quality levels and you can measure this for example by number of rejects in a given period and/or number of times the supplier delivers their promise
• Timely delivery against agreed lead time which can be measured against agreed delivery time
• Responsiveness-how quickly the supplier responds to a distress call or downtime
• Cost/Price-number of times the supplier changes the pricing within the contract period
• Number of short-supplies or incomplete deliveries/order fulfilment
• If an outsourced service the cost and service levels
• Accurate information and timely information sharing e.g. Automation levels
• Availability of and conformance with environmental policies
• Skills-set of supplier employees

Note: As an organization you will need to set performance targets with your suppliers and embed them in your contract.

For the Health sector the KPIs will depend on the specific products for example:

• Quality of vaccines or medicines delivered-how many times drug potency has been lost may be due to poor cold chain management
• Expiry-number of times a supplier supplies short expiry or expired drugs for instance
• Availability of appropriate storage or warehousing infrastructure
• Reliability of supplies so that patient treatment regimens are not disrupted
• Compliance levels e.g.to Good Manufacturing Practice

Overall, the sector and organizational goals determine their expectations on performance from suppliers.

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